What The Shuanghui-Smithfield Acquisition Means For Chinese Overseas Investment

Shuanghui International’s record-breaking $4.7 billion acquisition of Smithfield Foods in the U.S. is only the latest illustration of how Chinese overseas investment is moving beyond natural resources into the homes of everyday American and European consumers (Chinese Internet firm Tencent is quickly following suit). I started to write this article in a Manganese Bronze taxi in London on my way to Heathrow Airport. Manganese was on the verge of bankruptcy earlier this year until Hangzhou-based Geely invested £11 million ($17.5m) in February to save the struggling firm. Geely is best known for its 2010 acquisition of Volvo for the significantly larger sum of $1.5 billion. When the cab driver pulls into the international departure terminal at Heathrow, I’m reminded of last year’s £450m ($726m) investment by Chinese Investment Corporation (CIC) taking an approximately 10% share in the international airport. After passing British customs, I check my flight information on the departure screen only to see an advertisement for Lenovo’s latest “Yoga” laptop flashing on a nearby monitor. The innovative new product has a foldable screen that can be typed on as a laptop or easily converted into a tablet. Lenovo’s successful innovations are the result of incorporating the right global talent, investment in R&D, and a strategic acquisition program that began with its hallmark $1.25 billion acquisition of IBM’s personal computing division in 2005 and has continued worldwide from Germany to Japan.

Lenovo in Heathrow

Despite regularly making headlines today for global deals, Chinese investment outside the Middle Kingdom is still a relatively new phenomenon. After years of economic isolation, starting in the 1980s China experienced an influx of foreign direct investment from Western companies seeking to use China as a low-cost production base and more recently preparing to sell to its emerging consumer market. In the other direction, while small-scale Chinese traders operating through diaspora networks had long been active, larger Chinese firms did not start to invest overseas in earnest until the early 1990s. Annual outward investment flows barely exceeded $2 billion per year (inward flows at the time exceeded $40 billion) until the launch of China’s zouchuqu or "going out" policy in 2000. What began as a state-sponsored push to secure natural resources in developing markets and get surplus capital out of China during the early 2000’s has diversified across industries and geographies – especially into advanced economies in the United States and European Union.

What is most significant is the rate at which Chinese investment is increasing, the growing diversity of sectors and geographies that it is occurring in, and the large number of high-profile overseas investment deals made by Chinese companies. However, to fully understand the scale and scope of this phenomenon we need to answer a series of critical questions:

1. What are the motivations for Chinese companies to expand globally?

2. Are Chinese firms ready to do business in developed Western economies?

4. What are the potential concerns that developed countries, China, and Chinese firms should consider?

5. What are the potential benefits from Chinese investment?

6. How should Western countries, China, and Chinese companies respond?

The articles to follow in this series will address each of these questions in detail. Chinese companies investing in advanced economies will irrevocably reshape the global business landscape. Their investments herald both tangible benefits as well as potential concerns. Engaging with these questions is critical to maximizing the benefits of Chinese investment and minimizing the potential concerns for all sides.